Tuesday, January 3, 2012

Employer of Last Resort, buffer stocks and price anchors.

The folk who advocate having government as employer of last resort (ELR) often claim that ELR employees form a “buffer stock”, which works in the same way as the physical buffer stocks that governments sometimes maintain to iron out fluctuations in the price of physical commodities.

The alternative to ELR is unemployment, and of course both the unemployed and ELR employees act as a buffer stock – in that the buffer stock analogy has any substance, which I don’t think it does.

As regards preventing sudden FALLS in the price of labour, does the above so called buffer stock achieve this? The answer is “no”, because it’s very difficult to get the price of labour to fall: as Keynes rightly pointed out, “wages are sticky downwards”.

As regards INCREASES in the price of labour, does the alleged buffer stock prevent an excess rise in wages given excess aggregate demand? Nope.

In fact wages and prices can rise much faster than is acceptable long before the so called buffer stock runs out. Which makes the so called buffer stock very different from conventional buffer stocks. That is, as long as government has a finite stock of some commodity in its buffer stock, it can sell that stock and ameliorating price increases. The same does not apply to the ELR or unemployed so called buffer stock.

Thus the whole buffer stock analogy is flawed.

Are ELR employees a better buffer stock than the unemployed?

Well there is bound to be a FINITE difference between the two, but I doubt the difference is significant.

For example it can be argued that ELR employees are more employable than the unemployed because the former have their work habits maintained, plus they may learn or at least maintain skills while doing ELR work. But there are flaws in that idea.

First, as regards the idea that the unemployed lose or partially lose the ability to turn up to work on time because of a year or two’s absence from formal employment, one has to wonder how teenagers manage to enter the labour market, given that they have never in their lives had to turn up day after day, 50 weeks a year at some place of work. Same goes for women who take fifteen years off work to raise kids, and then re-enter the labour market.

However, the evidence is mixed here. Webster claims the unemployed are not “scarred” by their period in unemployment. Others claim there is a scarring effect.

Second, it is questionable on the face of it whether the sorts of activities that ELR typically involves are a good preparation for regular jobs. At worst, ELR consists of street sweeping and leaf raking, which are clearly not a good preparation for regular work. And indeed, this “on the face of it” conclusion is backed by some evidence.

A study of Swiss temporary subsidised work found that temporary subsidised jobs with EXISTING private sector employers DID improve subsequent employment histories for those involved. In contrast, the subsequent employment histories of those doing the above typical ELR jobs was ACTUALLY IMPAIRED by such employment. (Note, incidentally, that I’ve advocated temporary subsidised jobs with EXISTING employers, public and private, on this blog over the last few days.)

Third, the chance of skills being maintained while doing ELR work is not good. This is because people are unemployed PRECISLY BECAUSE there is a surplus of their particular type of labour or their skill in their neighbourhood.

I.e. if there is an excess supply of plumbers in town X, an ELR scheme will be hard pressed to find large amounts of plumbing work in the town that really needs doing.